Global Economic Outlook and Strategy - Kadin Indonesia

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February 28, 2008 Global Economic Outlook and Strategy Stephen Halmarick Paul Brennan Annette Beacher (61-2) 8225-6043 Australia and New Zealand Economic growth in Australia probably slowed slightly since the third quarter of 2007, but not by enough to alleviate inflation pressures. The Reserve Bank of Australia’s underlying inflation measures accelerated further in the fourth quarter, the unemployment rate fell to a new low of 4.1% in January, and credit provided by banks has continued to grow briskly. Moreover, lead guides such as job vacancies have remained at high levels despite a sharp drop in business confidence. In addition, higher contract prices for iron ore and most likely coal will help boost Australia’s terms of trade by a further 5% this year. With inflation continuing to rise, measures of monetary policy such as the real cash rate remain only slightly above neutral levels, even though the nominal cash rate is high. Another 100 basis points of tightening would be required to align the real cash rate with its peak in 2000 of just over 4%. Markets are priced for an increase of around half of this magnitude. While we agree with market expectations, the risks are very much slanted toward a third tightening early in the third quarter. This, in turn, could prompt economic growth to dip below potential by the end of the year. In New Zealand, two trends appear to be emerging: a weakening housing sector and slower retail spending. The trend in the housing sector is more pronounced, with lower house sales and prices. Moreover, the cooling housing sector and increased borrowing costs also will impact consumer spending over the medium term. Lower house prices could be a trigger for possible easing by the Reserve Bank of New Zealand, just as it raised rates in the past due to rapidly appreciating house prices. But an easing cycle is still some way off in our view. A tight labor market, rising wages and terms of trade, and a prospective fiscal stimulus will underpin consumer spending this year. With significant inflationary pressures to worry policymakers, we expect monetary policy to be on hold for all of 2008. Figure 33. Australia and New Zealand — Economic Forecast, 2007-2009F Australia New Zealand 2007F 2008F 2009F 2007F 2008F 2009F Real GDP a 3.8% 2.7% 3.4% 3.1% 2.1% 2.0% Real GDP (4Q versus 4Q) 3.5 2.8 3.4 3.2 2.2 1.7 Real Final Domestic Demand 5.0 3.5 3.5 4.1 1.6 1.4 Consumption 4.1 3.3 3.2 4.3 0.9 0.9 Govt. Current & Capital Spending 3.1 4.4 3.4 2.1 4.0 4.6 Housing Investment 4.1 0.7 4.9 3.8 -9.2 2.0 Business Investment 11.8 4.0 3.7 5.3 4.6 4.1 Exports of Goods & Services 3.8 1.3 6.2 2.2 2.1 3.2 Imports of Goods & Services 10.4 6.5 5.3 7.0 0.6 2.0 CPI 2.3 3.3 2.8 2.4 2.8 2.4 CPI (4Q versus 4Q) 3.0 3.0 3.1 3.2 2.3 2.4 Unemployment 4.4 4.3 4.6 3.6 4.0 4.4 Merch. Trade, BOP (Local Currency, bn) -17.9 -18.5 -20.5 -3.2 -2.9 -2.9 Current Account, (Local Currency, bn) -63.6 -59.4 -63.2 -14.1 -13.6 -12.3 Percent of GDP -5.9 -5.2 -5.2 -8.2 -7.5 -6.6 Budget Balance b (Local Currency, bn) 17.2 14.4 15.3 6.1 5.2 5.2 Percent of GDP 1.6 1.3 1.5 3.6 2.9 2.9 General Govt. Debt (% of GDP) c -2.9 -1.1 -2.5 3.5 4.0 4.0 Gross Trading Profits d 13.5 5.4 7.1 NA NA Na BOP Balance of payments basis. CPI Consumer Price Index. F Citigroup forecast. NA Not available. a Averaged-based GDP in Australia; Production in New Zealand. b Fiscal year ending June. Australia’s underlying cash balance c Australia and New Zealand Budget definition and forecasts. – debt equals an asset. d Company gross operating surplus. Source: Citi. 28
February 28, 2008 Global Economic Outlook and Strategy Yiping Huang (852) 2501-2735 yiping.huang@citi.com Minggao Shen 86 (10) 6510-2933 ext. 71068 minggao.shen@citi.com China: Renewed Inflation Challenge After a temporary dip in December, January consumer inflation rose to 7.1%, another 11- year high. The elevated inflation rate is probably the result of several factors — a slow supply response to rising demand, inclement weather, and the Chinese New Year holiday. February CPI could rise even further. High inflation complicates macroeconomic policymaking in China, especially with increasing weakness in the global economy, and could result in a combination of tight monetary policy and expansionary fiscal policy. As long as inflation remains high, the central bank will likely retain its tightening language. High inflation could create political as well as economic instability, as evidenced by the Tiananmen Incident in 1989. But we expect the year-to-year inflation rate to moderate starting in March, as snowstorms and the holiday effects recede and a higher base lowers year-to-year comparisons. Slowing exports also could ease inflation pressures by softening aggregate demand. During the past ten years, export growth slumped twice, first in 1998 and then in 2001. Both instances were followed by deflation. The relatively resilient Chinese trade data for January alongside weak U.S. retail sales in December led some investors to believe that “de-coupling” might be at work. January export and import data, however, were likely distorted, as traders rushed to have their products delivered ahead of the lunar holiday. More importantly, U.S. consumption remained relatively strong until December. Weak U.S. consumption probably translates into slowing Chinese exports with a lag of a couple of months. We expect the government to move decisively once economic momentum slows. As in earlier economic slowdowns, the authorities could boost domestic demand by increasing direct spending, encouraging state sector investment, and relaxing some existing controls. While distribution of additional funds may take some time, the authorities could accelerate the spending process once the annual budgets are allocated after the National People’s Congress meeting in early March. China’s GDP growth should remain strong this year, but its structure could shift significantly. Investment could again serve as an important countercyclical force, while consumption is likely to soften alongside weakening exports. Demand for nontraded goods should outperform that of traded goods, especially if cautious yuan appreciation continues, which we expect. Figure 34. China — Economic Forecast, 2007-09F 2007F 2008F 2009F Real GDP YoY 11.4% 10.5% 10.0% Real Final Domestic Demand YoY 12.7 13.3 12.4 Consumption YoY 11.3 12.2 11.4 Fixed Capital Formation YoY 15.3 14.0 13.0 Exports YoY 25.7 18.0 15.0 Imports YoY 20.8 19.5 18.0 Industrial Production YoY 18.5 16.8 16.5 Merchandise Trade Balance $bn 262.2 295.1 305.0 FX Reserves $bn 1528 1900 2000 Current Account % of GDP 10.8 8.8 7.0 Fiscal Balance % of GDP -1.8 -2.0 -1.5 General Govt. Debt % of GDP 56.1 54.2 49.2 Urban Unemployment Rate % 4.0 4.0 4.1 CPI YoY 4.8 5.0 4.0 Exchange Rate CNY/$ 7.61 6.98 6.35 One-Year Base Lending Rate %, p.e. 7.47 7.74 8.10 Source: Citi estimates. 29
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